Federal Reserve intervention in stock markets could trigger crypto gains: Market experts
According to Bitget Wallet COO Alvin Kan, the sheer magnitude and importance of the US stock market "gives policymakers a strong incentive to backstop major drawdowns."
Cryptocurrency markets stand to gain from enhanced liquidity should the United States central bank intervene to shore up the $75 trillion stock market during bearish conditions, given that it is "too big and too important to fail," market analysts indicate.
Over the last five years, the US equity market has expanded by 68%, accumulating approximately $6 trillion in additional market capitalization just this year. Nevertheless, market experts and analysts, including gold advocate Peter Schiff, have cautioned that this extended period of accelerated expansion might be positioning the market for a substantial correction.
This potential correction could prompt the Fed to "break decades of precedent" by purchasing equity ETFs to stabilize stock markets, Balchunas stated on Tuesday, while additional analysts suggested that the subsequent liquidity injection could create favorable conditions for digital currencies to thrive.
"Once the Fed steps in, rate cuts, balance-sheet expansion, even targeted ETF purchases, crypto has historically entered a medium-to-long-term uptrend, similar to what we saw in 2021, as risk appetite returns and capital rotates back into high-beta assets," Bitget Wallet chief operating officer Alvin Kan told Cointelegraph.
Stocks deeply embedded in American households
According to Balchunas, stock ownership reaches 58% among Americans, meaning "the political pressure to keep stocks out of a prolonged bear market is going to be very powerful."
During 2020, the Fed purchased corporate bond ETFs amid the COVID-19 crisis, functioning as a "buyer of last resort" to reinject liquidity into paralyzed credit markets. This historic intervention resulted in the acquisition of $8.7 billion in ETFs, which contributed to minimizing economic harm from the pandemic.
"I think there's a good chance the Fed will buy equity ETFs in the next major downturn to support [the] market, and it will be common practice going forward," said Balchunas.
Presently, central banks in China and Japan employ indirect equity ETF purchases through authorized intermediaries using public funds to enhance liquidity, and the United States might adopt similar measures, he continued.
"This is just one byproduct of the 'Nothing Stops This Train' monetary supply explosion and debt extravaganza sweeping the world, but especially in the US, which at this point feels irreversible."
Crypto remains tied to dollar liquidity
Tim Sun, senior researcher at HashKey Group, explained that an extended, serious bear market "would do far more than just erode investor wealth — it would directly shock consumer spending, compromise pension stability, stall corporate credit expansion, and dent tax revenues."
Although cryptocurrencies won't receive direct support from the central bank, "their macro pricing remains fundamentally tied to US dollar liquidity, real interest rates, and equity market risk sentiment," Sun added.
"Once market participants are convinced that a policy floor effectively underpins risk assets, the risk premium demanded for highly volatile assets will compress. As a result, Bitcoin and mainstream crypto assets are poised to benefit significantly from improving liquidity expectations and a broader revival in risk appetite."
Strong incentive to backstop major drawdowns
"This structural backstop supports a more resilient macro backdrop, and that's ultimately bullish for crypto's role as a growth and diversification asset in a world of expanding global liquidity," Kan said.
In the meantime, Jeff Mei, the operating chief of BTSE, told Cointelegraph that should a downturn materialize, "it's difficult to see the Fed printing more money to stimulate it, given that inflation is still high. However, there are other tools they can deploy to take action."